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Single stock futures trading: The advantages of futures contracts

by , 15 May 2014

There are a number of different financial products out there to trade. If you opt to trade single stock futures, there are benefits. These benefits all relate to the futures contracts used when you trade futures. So what makes that advantageous? Let's take a closer look…

Futures contracts are interchangeable

Futures contracts are standardised. It’s this trait that makes them interchangeable.

For example, you buy a futures contract in Company ABC. But you change your mind and want to sell it. You don’t have to find the seller and persuade them to buy it back. You can easily sell it to any other trader.

By being standardised, all futures contracts are identical and interchangeable. In derivatives jargon, they’re fungible.

To put it another way, if you bought 1,000 Sappi shares from Bob and then want to sell them, you don’t have to find Bob again. This is the whole point of having a market and a standard instrument.

Single stock futures obviously relate to shares, but there are futures on other things like interest rates, indexes and commodities. Without standard contracts it would be very difficult to trade things like this.

When you trade single stock futures, one futures contract is equal to 100 underlying shares. So if you want to trade 1,000 underlying shares, you’d need ten futures contracts.

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Trading single stock futures is flexible

Another advantage of trading single stock futures, is the transaction is flexible. Even through you trade a fixed contract, you can sell it at any time.

And this works the other way round too. If you enter a short trade, you can buy back to close the trade at any time.

You essentially just perform the opposite transaction to your original one to close your futures trade.

So there you have it, the advantages of futures contracts.

Single stock futures trading: The advantages of futures contracts
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